RD Energy Newsletter: March 2018

March 2018 Energy Market Update

KEY DRIVERS

  1. Strong start to winter NG demand in December/January hit the brakes in February.
  2. Final end of the winter season NG storage expected to be around 1400 bcf.  The 5 year average is 1718 bcf.
  3. Having a deficit storage balance against the 5 year average is bullish.  If February would have stayed cold the end of season number would have been extremely bullish.
  4. NG demand is bullish with 3-4 bcf/day of new growth: growing LNG and Mexico exports, new electric NG fired generation.
  5. NG supply is bearish: growing nicely in the short-term to keep pace and exceed demand.  However, if demand surges with hot weather or NG production drops with lower oil prices the price trend can change quickly to bullish.
  6. The marketplace could be in a window of time for attractive NG and thus electric prices.  Fundamentals can change very quickly with domestic and global influences.

Commentary

One month ago NG prices hit the highest numbers seen in a couple of years.  Today NG prices have dropped about $1/MMBTU to levels that are some of the lowest seen in the past 12 months.  When February turned warm NG prices fell fast and hard.  However, over the past couple of weeks they have been stable.  Prices are not in a free fall nor do we expect them to be.  In the short-term we are seeing some very attractive long-term electric prices especially in the 2020-2022 years.  NG burner-tip prices are still higher than a year ago as Appalachian basis continues to strengthen from the abnormally low numbers from a few years ago as a result of the Shale NG production boom.  A lot of energy consumers are assuming energy prices will drop in the Spring and Summer for no other reason than it’s not winter.  The energy markets are a lot more complex than that.  Higher oil prices have resulted in increased drilling and new NG production that comes with the new oil.  Oil is what they are drilling for so NG prices tend to weaken to keep the gas flowing and sold so the oil can be produced.  Even without a hot summer NG demand is rising for a variety of reasons: growing exports and new gas fired electric generation assets.  The tipping point for a balanced supply and demand is never too far one way or the other.    If oil prices drop along with drilling and new NG supply, and if we have a hot summer whereupon NG is gobbled up in the generation of high electric demand, then NG storage injection will drop and thus electric prices rise.  This is why it is so important to buy when attractive price opportunities exist to keep budget certainty stable and billed prices consistent or lower.


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